The Effects of the Proposed Arizona Minimum Wage Increase

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The minimum wage has become a favorite election-
year issue at both the state and national
levels, with many politicians arguing that a hike
is needed to pull hardworking families out of
poverty. Unfortunately, raising the minimum
wage has unintended consequences, which often
hurt the very people the hike was intended to
help. Decades of research show that higher mandated
wages are associated with job loss among
the most vulnerable employees and displacement
of low-skilled adults by wealthy teens. Ironically,
while the poor bear a disproportionate burden
of job loss and displacement, the vast majority
of the benefits go to families living far above the
poverty line.

This paper by economist Dr. David Macpherson
from Florida State University analyzes the
proposed initiative to increase the minimum
wage in Arizona from $5.15 to $6.75 in January
2007, and index it to inflation starting in January
2008. By using Current Population Survey data
and labor demand estimates, this research shows
that the proposed increase will be an expensive
mandate on the employers—and citizens—of
Arizona. Even more troubling, this enormous
expense will do little to increase the quality of
life for the state’s poor—and will greatly worsen
conditions for those who lose their jobs following
the increase.

The poor targeting of this proposal is clear in
the distribution of benefits—and burdens—that
are anticipated from the increase. Nearly 70 percent
of the benefits will go to families above the
poverty line, with more than 25 percent of the
benefits going to families with annual incomes of
over $60,000. Unfortunately, the families living
in poverty will bear the brunt of the attendant
job loss, with 37 percent of the job loss accruing
to families with annual incomes of less than
$25,000. The least-skilled members in the workforce
will also suffer disproportionately, with
high school dropouts experiencing 29 percent of
the job loss.

Overall, the minimum wage hike is projected to
cause 4,627 employees to lose their jobs, causing
an annual income loss of $54.8 million for these
employees. The leisure and hospitality industry
will be particularly hard hit, bearing 66 percent
of the job loss. Meanwhile, employers’ labor costs
would go up $87.4 million annually.
The findings reported in this paper, and the
calculation of the enormous economic cost of a
mandated wage increase, ought to temper enthusiasm
for a minimum wage hike, especially since
the proposed initiative would confer most of its
benefits on families who are not poor and impose
a significant burden on those who are.